Cash flow forecasting of
In the previous section we looked at how to build projected financial
statements based on historical financial statements, and in turn use the
cash flow statement generated by the spreadsheet to undertake an
analysis about the borrower’s future ability to repay credit facilities. This
exercise in turn entailed mastering various supporting component tech-
niques such as net sales projections, historical averages of ratios, manip-
ulating ratios, constructing debt runoff schedules, and making assumptions
about allocation of new money needs. All this is useful when looking at
a company with a historical track record.
There are other scenarios, however, that require cash flow projection
techniques – for example, a merger of two companies, or the case of cre-
ating a special purpose vehicle to build a large-scale construction pro-
ject such as a metro system, airport, road or dam. Here we are also
interested in the use of projections, for example in understanding the
future condition of an entity that a lender may be presently considering
extending finance to. In this case, the key importance in preparing pro-
jections is not only to assess the inherent credit risk but also how to
enhance that risk due to judicious structuring of the financing facility
and identification of negotiating points to enhance that security further.
The underlying data and focus of this analysis will therefore be quite
unlike that in the preceding chapter, and the analytical and construction
techniques will be significantly different.
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